Personal Finance: The Six Steps To Building Credit With Personal Loans

Fixing your credit isn’t always easy. If you’ve made mistakes in the past or if you’ve found your credit wrecked for other reasons, it can feel like making any kind of real change will take decades. Fortunately, there are shortcuts to fixing your credit score, some of which can help you to pay down debts quickly while seeing your score rise. One of the best is taking out a personal loan, a process that’s quite useful building up your credit score as long as you approach the process in the right way. Below are the steps you’ll want to take to maximize the effectiveness of taking out a personal loan.

Look at Your Needs

Your first step always needs to be looking at this process objectively. Taking out a personal loan is not the only way to fix your credit score, nor is it the cheapest. It is, however, a fantastic way to fix your score if you have very bad credit and need to pay off other debts. Stop for a moment to determine if you can make monthly payments and if there is a good reason for you to take out money. If the answer to both questions is yes, you can start the process of taking out your personal loan.

Check Your Credit

Before you start trying to rebuild your credit, you’re going to want to take a look at where your current credit stands. The last thing you want to do is to apply for a number of loans and have your application rejected, as this can impact your credit score. Instead, you’ll want to start by knowing what your credit score is, what your debt-to-asset ratio looks like, and to look at the scores lenders want before you ever put in an application. The more work you do ahead of time, the less of a hit your credit will take when you start putting in applications.

Shop Around

Your next step is to start looking for the loan that’s going to best meet your needs. Do some shopping around, focusing mostly on those lenders that have no credit or low-credit loan options. The interest rates are going to be higher, but you stand a much better chance of getting approved by these lenders.

Your goal, though, should be to find the best rate for which you can qualify. You want to keep your interest rates down so that your monthly payments will be low and so that you can spend the least amount of money possible paying off your loans. Shop around until you can find the perfect mix of a company that will actually accept your application and one that won’t charge you too much for borrowing money.

Your research should lead you to at least a few companies that work for your credit range. Save their information and do some extra digging. Try to figure out which company has the best reputation, which makes paying easier, and whether any of the companies will make the process of applying for and receiving your loan the easiest.

Borrow Minimally

Don’t borrow just to borrow. Instead, take out your personal loan so that you can put that money to work. If you can secure a good interest rate, for example, you should use the money you borrow to pay off a credit card that has high-interest rates. You can also use the money to pay off other debts or even to attack your student loans. The goal of taking out your personal loan isn’t just to raise your score by making payments, but also to raise your score by taking care of your other debts. By the time you pay off your personal loan, your debt-to-asset ratio should look at least a little better than it did before you took the loan out.

Make Automated Payments

Once you have taken out your personal loans, your goal should be to make regular payments. Each payment you make will help your credit score to go up a little and will allow you to present a better on-time payment percentage. This is one of the best ways to get a good boost on your score, so don’t mess this step up. The best way to ensure that you continue making payments on time is to automate those payments.

Most major lenders will give you the option to automate your monthly payments. You may have to do so online or in the office, but you can set up date each month for your personal loan payment to be debited from your account. This will ensure that you don’t miss a single payment and that your credit score keeps climbing. If you don’t think you’ll be able to make a payment, you should be able to call your lender and set something up so that your credit score isn’t hurt too badly by your oversight.

Pay It Off

Once you have the payments set up, your goal is to pay off your loan. There are arguments for and against paying off the loan as fast as you can, but the goal really is to make sure that you’re paying the loan off. Make this loan one of your top priorities, especially once you’ve used it to pay off all of your other debts. You should be able to get in a position that will allow you to eliminate this new debt and walk away with a much better credit score than you had when you started out.

Taking out a personal loan is a proven way to improve your credit. There are other methods, of course, but this one often works the best for people who have very poor credit but who nevertheless want to start tackling their debt. So long as you are able to keep up with your payments, you’ll be able to raise your credit score and put that money to good use elsewhere paying down your other debts.

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